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Government of India VS RBI

Government of India VS RBI

As a former officer of the Reserve Bank of India, I was shocked to read the recent remarks of Viral Acharya, Deputy Governor of the Reserve Bank of India. There are probably no parallels or precedents to such public remarks that tantamount to threatening the government of India by a ranking leader of the Bank.

The RBI, India’s Central Bank is a venerable institution that effuses dignity and reverence in the world of banking and finance, not only in India, but the world over. Its rather quaintly abstruse and almost self-effacing communication style – be it in its official communiqués or while interacting with the public at large – speaks of its tradition and élan that is generally matchless. This quiet dignity actually conveys so much more than what it actually says and adds an aura of enigma to it. For example, even a passing nod from the RBI Governor at a meeting of CEOs of banks can set tongues wagging.

Like most other Central banks, its presence is felt, rather than heard. Insiders are aware that RBI’s reticence and an unwillingness to hog the spotlight is also a calculated strategy to create space for itself.  It provides enough room to maneuver, change course if needed, and fight its battle with the government quietly and behind closed doors. That has only earned it respect and reverence.

Given this grand setting, it was upsetting to read the speech of Viral Acharya. It is very amateurish indeed and only betrays a lack of experience in a managing a large banking bureaucracy. He is certainly oblivious of the ethos and dignified traditions of a great institution that he represents. That the Deputy Governor chose to attack the central government in a public lecture has not only raised eyebrows, but also raised questions of why the government has not acted on this. His continuing in office has become untenable.

The RBI and the Government of India are like inseparable Siamese twins who have to work together in the interest of the country. Like wedded partners, they have enjoyed great moments of comradery as well as intense frictions in their relationship. Over the years, both have learnt to resolve or manage the differences amongst themselves without impacting the day to day operations or the public getting wind of it.

Having said that, let’s look at the controversy itself. It has been reported that the differences arose, among other issues, over the government’s proposal to transfer approximately Rs.3.6 lakh crores of reserves to itself. This is not unseemly given that the RBI is an agent and banker to the government. Differences over the use of the reserves are legitimate and must be discussed in closed rooms and not via the media. But in all such matters, if one is guided by past experience, the government view prevails.

For all practical purposes, the RBI has been and continues to be an extension of the Ministry of Finance, government of India. All past and current Governors and members of the Board are keenly aware that in any differences or tussles with Delhi, the Ministry of Finance has the last laugh. If, despite this understanding, Viral Acharya chose to discuss differences in public, it only points to issues extraneous to the functioning of the Bank.

The reason for RBI playing second fiddle to the governments stems from the RBI Act itself. The government appoints the Governor and has the power to sack him. It also has enormous powers to instruct the RBI directly or through its board to carry out its dikats.  In fact, there have been numerous instances of this.  One interesting anecdote that has done the rounds is that during bank nationalization in 1969, some in the RBI were said to have had their reservations. Apparently, Mrs. Gandhi’s office called the concerned senior officers directly and ordered them to prepare the necessary paperwork for the legislation. It was done quietly without any further ado.

After Independence, the government of India had firmly established a tradition of appointing IAS officers or other Central Services officers, particularly from the Ministry of Finance as Governors. This way, it ensured a de facto control of the Bank. Of course there have been a few notable exceptions – like Dr C.Rangarajan who was a former Deputy Governor.  Hence all this talk of the Bank’s independence is purely academic and largely a creation of the media to exacerbate the tensions. RBI for its part understands this and is fully reconciled to this reality.

It is the Congress governments that take the cake for running roughshod over the RBI. Many are only keenly aware of the tenuous relationship between P.Chidambaram, the former Finance Minister and Governors of RBI, particularly Dr.Subba Rao.

The current Chairman of the US Federal Reserve, Jerome Powell is also under pressure from the Trump administration. President Trump is on record fighting against the Fed. But the Chairman, given the august traditions of the Fed, has refused to enter into a public fracas. That does not mean he has given in to Trump’s pressure. On the contrary, he has continued with his interest rate regime in a dignified manner, never engaging the President in public.

As expected, the media too has had a role in overhyping the controversy. That the issue has been repeatedly opined upon by known Modi baiters comes as no surprise.  Also the timing  – a few months before the general election – seems too much of a coincidence. But what is surprising is the amount of support they have generated in the international press.

Viewed in this context, the Deputy Governor’s remarks reflect very poorly on the man. Firstly, the public airing of differences with the government is unprecedented. Secondly the reference to inherent threat to financial markets and hence the overall economy seems outlandish, to say the least. It must be made clear here that the markets will continue with minimal or almost no impact if the Governor and his team are sacked. The markets are dictated by the economic fundamentals and the overall regulatory regime that define the financial and banking infrastructure in India. These are already in place and will be hardly impacted by the individuals.  Lastly, the deputy Governor has displayed a complete lack of awareness of the ethos of the magnificent institution he represents. The markets and the executive leadership of banks in India now recognize this.

It is time for the Modi government to act decisively and bring in new blood into the RBI.

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MODI ATTENDS COMMONWEALTH MEET IN LONDON

MODI ATTENDS COMMONWEALTH MEET IN LONDON

The recently concluded 25th Commonwealth Heads of Government Meeting (CHOGM) summit in London saw the participation of fifty three countries. Of these, only two countries (Rwanda and Mozambique) do not have a colonial past or a constitutional link to Britain. All Commonwealth members avow the leadership of the British royals. This biennial gathering of leaders from round the world is indeed a grand show of pomp and splendor.

This year’s Commonwealth Summit has been billed as a grand opportunity for India not only to showcase its growing economy but also project its leadership in an emerging new world order. It has been further argued that it provides a unique platform of influence for India where China is conspicuously absent. No wonder, Prince Charles air dashed to New Delhi on a charm offensive to invite Prime Minister Modi in person to attend the Summit.

But there is more than meets the eye. Many see the Commonwealth as a vestige of the past, conceived by Britain to arrest its declining influence in the world. Despite its large membership, it continues to be high on optics and low on influence as it struggles to find relevance in an ever changing world order.

India’s relationship with this body can best be described as lukewarm. From India’s perspective, despite being home to over 50% of the population of the Commonwealth and with the second largest economy, next only to the UK, it has never enjoyed pride of place. That the Prime Minister Modi decided to even attend the CHOGM 2018 Summit came as a surprise to many, given that he had declined to attend the previous Summit.

Large sections of Indians, given its track record, are not exactly enamored by the Commonwealth and even view it with suspicious. For instance the Commonwealth provides that no bilateral or internal issues should be raised by members in its meetings. Despite this, Pakistan has been allowed to raise the Kashmir issue on multiple occasions, angering the Indian establishment.

Secondly, the UK’s anti-India stance as seen from its support of Pakistan in its wars against India has not endeared itself to Indians. Its support of Pakistan during the 1965 and 1971 conflicts are well documented. In peace time too, for example during the cold war era, it worked against India’s interest. In the eighties, it had actively supported Kashmiri separatists and refused to crackdown and deport them despite official requests from India.

So the average Indian cannot be faulted for a lack of interest in the Commonwealth or its affairs. Despite the slick campaign to project the CHOGM 2018 Summit as an economic and leadership opportunity for India, the disinterest is obvious.

The Commonwealth’s claim of providing economic opportunity for India is doubtful. This is because it is difficult to ascertain how much of India’s trade with fellow members came from bilateral dealings or directly as a result of the membership. Also there is no exclusivity clause that binds members to trade with fellow members. India’s policy makers are acutely aware that with or without the Commonwealth, its growth trajectory will stay its course for many years to come.

But what could be the reason for this desperation in rejuvenating a moribund organization? The truth probably lies in the sinking economic fortunes of Britain itself. That the UK economy is in the pits is by no means a secret.

Firstly, Britain is having major economic upheavals on the domestic front amidst an unfriendly European Union following Brexit. According to UK’s Office for National Statistics (ONS), its economy grew slower than expected. Its annual GDP growth for 2017 was put at 1.7%.  Secondly, UK’s Office for Budget responsibility (OBR) forecasts that its economy is expected to see an average growth of 1.4% over the next five years. This is indeed bad news for the Brits.

According to an analysis (The Guardian ,Feb 22nd 2018), the British economy continues to show fresh signs of deterioration. It has been pointed out that economic activity in multiple sectors have lost “momentum”. The alarming rise in unemployment, low wage growth and weak consumer spending are now part of Britain’s new normal.

The only saving grace, according to the UK’s National Institute of Economic and Social Research (NIESR), was a robust global economy which helped its exports, thanks to a weaker Pound. Post BREXIT, Britain is seeking new economic pastures to revive its economy. It is common knowledge that many developed countries are courting India to kick start their own economies. Thus it is no surprise that the Brits went all out to woo India.

As far as Modi’s trip to London was concerned, the CHOGM 2018 Summit itself did not make much of an impact or news in India. The strong anti-British sentiments in India – largely due to the colonial rule as well as UK’s long anti-India stance after 1947 – provides a powerful overhang that will not be easy to dissipate.

What really captured the minds of Indians was Modi’s meeting with the diaspora at an event of invited guests at the Central Hall, Westminster. Although attended by smaller audience, the event was telecast live around the world and as expected had a huge viewership. Modi smartly used the opportunity to convey what many believe is the clarion call for the 2019 general elections in India. This dominated his London trip, rather than the meetings with heads of fifty three governments from around the world.

The Commonwealth’s impact in providing tangible benefits to the member nations is debatable. The benefits, if any, are skewed unduly in favor of the UK. This is an unsustainable model in today’s world where China and India are fast emerging as economic power houses. Britain has pumped tons of good money in keeping alive an organization that is long past its shelf life. With a failing economy, Britain too may quietly bid goodbye to an institution that stood as a grand testimony to a bygone era. That being said, the Commonwealth, despite bold statements to the contrary, is probably in its last innings.

 

 
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Posted by on May 3, 2018 in #Brexit, India, Modi, Uncategorized

 

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